Tag: Leprechaun economics

The recent release of Ireland’s national accounts for 2017, showing a (preliminary) increase in real GDP of 7.8%, precipitated another round of complaints about the relevance of such data, including ESRI comments calling for a ‘parallel’ set of accounts to be published, stripping out the impact of the ‘large transactions of a select number of firms’.

In fact the CSO already publish a number of adjustments, following the clamour accompanying the release of the 2015 accounts, which were the first compiled under the new EU standard, ESA 2010, prompting some to talk of ‘leprechaun economics’. A modifed capital formation figure is produced in the quarterly accounts which strips out two components- aircraft leasing expendidure is excluded from total spending on machinery and equipment and R&D spending on intellectual property service imports is excluded from total spending on Intangibles. The latter is GDP neutral anyway (investment boosts GDP but if imported will have an offsetting negative impact) but Intangibles has contributed to a huge increase in the investment share of GDP, as well as being extraordinarily volatile on a quarterly and indeed annual basis. This adds to the difficulty of forecasting Irish GDP but, nonetheless, is the internationally accepted norm in that such intellectual property used to be viewed as a cost of production but is now (rightly ) deemed to be an asset , be it dometically generated or transferred from abroad.

The CSO has also introduced a modified Gross National Income (GNI) figure , GNI*, albeit only published with the full annual accounts, and one wonders if this was embraced too readily. This concept is unique to Ireland and makes a number of adjustments to the headline GNI figure, largely reflecting the depreciation of intellectual property assets and aircraft as well as excluding the profits of firms re-domiciled in Ireland.Yet it is unclear what the final figure is supposed to mean and the adjustments are arbitrary, (why aircraft leasing, for eample, which has a long history in Ireland, and are firms domiciled here or not?) as well as confusing in that the term ‘gross’ is still used, even though some depreciation is excluded. Indeed, if depreciation is the issue why not simply use Net National Income (NNI), which adjusts for total depreciation across all sectors, and has always been published on an annual basis. Moreover, the correlation between NNI and GNI* on the annual data going back to 1995 is extremely high , at 0.99.

GDP is the internationally accepted norm, of course, and closer to home most people would view the debate as arcane. Other readilly available indicators exist that are of use in capturing real developments in the economy depending on the question asked. The surge in employment in recent years and the plunge in unemployment is real enough for many households, as is the increase in household incomes. Similarly we can track consumer spending in the national accounts. Some argue that the GDP figure , when used as a denominator, gives a misleading indicator of Ireland’s debt burden, but again there are other metrics which one can use, including debt to tax revenue. Another perceived problem is in relation to forecasting for the Budget, but that is done on a bottom up basis anyway by the Department of Finance i.e. income tax receipts reflect employment and pay assumptions and VAT forecasts depend on consumer spending projections.

The change to a new methodology in collating the national accounts had a huge impact on Ireland’s recorded GDP, but this was a step adjustment and need not lead to a host of ad-hoc exclusions, while any volatility going forward reflects the scale of multinationals relative to the indigenous economy and hence a fact of modern Irish life. Real growth in the latter part of the 1990’s averaged over 9% per annum, driven by multinationals, so the average over the last two years ( 6.5%) is not that unusual. It is also curious that the the Irish authorities spend an inordinate amount of time defending the multinational presence in Ireland as real, yet also devote time and effort in producing arbitrarily adjusted GDP figures to strip out part of that multinational impact.